1 NATIONAL ECONOMICS UNIVERSITY INTERNATIONAL ECONOMICS 2 MIDTERM EXERCISE TOPIC OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE.1 NATIONAL ECONOMICS UNIVERSITY INTERNATIONAL ECONOMICS 2 MIDTERM EXERCISE TOPIC OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE.
NATIONAL ECONOMICS UNIVERSITY -*** - INTERNATIONAL ECONOMICS MIDTERM EXERCISE TOPIC: OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM Class: International Economics EEP 62B Group 6: Nguyễn Tuấn Sơn Lê Thành Đạt Phạm Đức Minh Tạ Xuân Sơn Nguyễn Cảnh Quân Nguyễn Hoàng Tuấn Nguyễn Hoàng Uyên Lê Quang Huy Lecturer: Ngô Thị Tuyết Mai HA NOI, 2022 INTRODUCTION The foreign exchange market is one of the most important factors in a market economy When the foreign exchange market is well controlled, it will help us control and coordinate all economic development activities of a country, as well as improve competitiveness in the field of imports and exports, control the trade balance Build an appropriate foreign currency reserve ratio structure, regulate capital structure in production, create confidence in the currency in the future Controlling the foreign exchange market well plays an important role in the country's economic development Vietnam, like developing countries, is currently facing a dilemma in choosing the basic objectives in operating macroeconomic policy, namely the foreign exchange market The issue we need to pay attention to is choosing an appropriate policy for the foreign exchange market to manage the macro-economy in accordance with the current economic growth stage This is the goal of the report, our group of choses as the topic "OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM" with the aim of having a clearer view of the foreign exchange market in the world and in Vietnam, along with the role of the state bank in regulating Vietnam's foreign exchange market We would like to thank our lecturer and look forward to her pointing out the shortcomings that still exist in the report TABLE OF CONTENTS I OVERVIEW OF THE FOREIGN EXCHANGE MARKET DEFINITION CHARACTERISTICS FUNCTION .4 HISTORY .5 a International b Vietnam II PARTICIPANTS IN THE FOREX MARKET COMMERCIAL BANKS: TRADITIONAL USERS: .6 FOREIGN EXCHANGE BROKERS: CENTRAL BANK: NONBANK FINANCIAL INSTITUTIONS: III FOREX MARKET STRUCTURE FOREX EXCHANGE .8 OVER-THE-COUNTER MARKET .8 INTERBANK MARKET: .8 IV INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM .9 LIMITATIONS IN VIETNAM FOREX MARKET THE REGULATION OF THE FOREIGN CURRENCY MARKET BY THE STATE BANK OF VIETNAM IN RECENT YEARS .10 a Control foreign currency credit growth at a reasonable rate: 10 b Apply synchronous measures to maintain the exchange rate within the committed range: 10 c 0% interest rate applies to deposits in USD: 10 d Announcement of the central exchange rate: .11 e Adjust the exchange rate incrementally to avoid shocks 11 V SPECIAL CASE 11 I OVERVIEW OF THE FOREIGN EXCHANGE MARKET DEFINITION - Firstly, we will learn about the forex market concept The foreign exchange market is defined through three perspectives: The foreign exchange market is the market where international currencies are bought and sold Foreign exchange market refers to the organization setting within which individual businesses, governments and banks buy and sell foreign currencies and other debt instruments The foreign exchange market is a market for converting the currency of one country into that of another country CHARACTERISTICS - - - - High liquidity This market is the most liquid market in the world This involves trading between different currency pairs around the world Traders in the market are free to buy and sell currencies at any time of their own choice Transparency This is evident to traders of the forex market: they have access to all data and information related to the market Transparency will make it easier for traders to track price movements through their portfolios in real time Dynamic feature The market structure shows its unending dynamism In the foreign exchange market, currency values change every second and hourly according to economic fluctuations depending on the country that owns that currency 24-hour operation The market rotates non-stop with activity 24 hours a day This clearly demonstrates the market's supply to traders with the ability to trade at any time FUNCTION - - Transfer + Transfer of Funds or Purchasing Power Currency from one Nation to another + Meet the needs of buying, selling, and exchanging foreign currencies for circulation and payment in the fields of international investment, international trade, tourism Credit Function + Foreign currency credit solves the problem of the time when goods are transported from exporter to importer To Provide the Facilities for Hedging and Speculation + Help traders hedge foreign exchange risk in foreign currency exchange - + It also helps speculators to profit if they can predict future exchange rate movements The State's macroeconomic management role + A tool for the central bank to implement monetary policy to control the economy according to government goals by adjusting the exchange rate through buying and selling foreign currencies HISTORY a International Source: Dailyfx b Vietnam - - Before 1990-1991: + No organized Foreign Exchange Market + Followed socialist subsidized economic model => fixed exchange rate + Only exchanged foreign currency with socialist countries => After the 86’ renovation, lots of USD was coming into our country while the exchange rate of VND-USD was significantly low => The trade deficit Between 1991 and 1994: + August 1991, establish foreign trading centers in Hanoi and HCM City with main targets: 1.To establish an official foreign exchange market for transactions between banks and individuals 2.To preview and measure supply and demand for foreign currency 3.To regulate the official exchange rate of VND-USD To prepare for the foreign exchange market in the future + The Central bank set up a floating VND regime (to stimulate foreign currency transactions and promote trade) But the economy has not yet - - recovered from the crisis, the market mechanism has not really worked, and the supply of foreign currency is much lower than the demand => Therefore, exchange rate fluctuations have a negative impact on the economy, so the central bank of Vietnam must set an exchange rate that only fluctuates a certain amount Between 1994 and 2007: + In 1994 foreign trading centers stopped working, instead interbank foreign exchange market started working in order to build an organized market which helps trade foreign currencies between commercial banks 2007 till now: After Vietnam became WTO member: + Vietnamese Foreign exchange has been constantly evolving + Foreign currencies have appeared more in Vietnamese Forex Market, so the government need to protect VND more carefully II PARTICIPANTS IN THE FOREX MARKET COMMERCIAL BANKS: - Acting an important role in the foreign exchange market Because most large-scale foreign exchange transactions are done through commercial banks Commercial banks conduct foreign exchange transactions for two purposes: + Provide services to customers by buying on behalf of customers and selling on behalf of retail customers + Do business for themselves by buying foreign exchange to make a profit when the exchange rate changes Source: IFRS Vietnam TRADITIONAL USERS: - Corporations, tourists, importers, exporters, investors, etc Several types of companies make foreign exchange transactions for their own production and business activities - Individuals who have the need to buy and sell foreign currency for the purpose of operating for themselves, not for the purpose of trading foreign exchange FOREIGN EXCHANGE BROKERS: - They are specialist companies playing the role of intermediaries between the different banks and they don’t buy or sell foreign currencies for themselves Top Foreign Exchange Brokers CENTRAL BANK: - Acting as seller or buyer of last resort when the nation’s total foreign exchange earnings and expenditures are unequal - Organize, control, and stabilize the operation of the foreign exchange market to stabilize prices and exchange rates The central bank's transaction volume is not large, but the impact of these transactions on the foreign exchange market is very large because it is related to future macroeconomic policy NONBANK FINANCIAL INSTITUTIONS: - Hedge funds Mutual funds III FOREX MARKET STRUCTURE The foreign exchange market is diverse in terms of participants However, the foreign exchange market is divided into three distinct structures: FOREX EXCHANGE OVER-THE-COUNTER MARKET INTERBANK MARKET: - The most developed form of the foreign exchange market, where transactions of exchanging and buying and selling foreign currencies between state banks and commercial banks take place Participants in the interbank market: + Commercial banks: in the inter-bank foreign exchange market, commercial banks are considered as active participants and as makers of the foreign currency market They list the buying or selling prices of foreign currencies to other banks, based on a set price, banks will conduct exchanges and transactions directly with each other + Central banks: the central banks of countries that participate in the interbank foreign currency market to increase the country's foreign currency reserves and operate in the interbank foreign currency market to stabilize the exchange rate in the national currency market + Broker: some banks will have the need to choose a form of transaction through a broker, if necessary, brokers coordinate with these banks to compare, contrast and find out the purchase price or best seller IV INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM Before looking at the interventions of the State Bank of Vietnam, we will look at the disadvantages of the Vietnamese foreign exchange market in recent years: LIMITATIONS IN VIETNAM FOREX MARKET - The foreign exchange market in Vietnam today, although only recently formed, is considered by financiers as a market with strong growth potential and is gradually stabilizing Despite being a potential and diversified market for trading products, the foreign exchange market in Vietnam is still not fully developed, especially derivatives This shows that the trading volume is still low The main reason is due to: + Lack of real demand from customers This is considered as a core issue because Vietnamese enterprises have not had the habit of paying attention to and taking risks with foreign currency activities Typically, in the period 2007-2008, the Vietnamese market suffered a wobbly phase when the USD/VND exchange rate fell sharply to the floor level The reason is due to a large amount of foreign currency from foreign direct and indirect investment activities, and businesses often borrow a lot of foreign currency to invest in large projects, then convert from VND to USD to repay the debt This creates large fluctuations in exchange rates and lending rates + Lack of legal basis Because exporters often convert foreign currency into VND to serve domestic production and business activities and investment, they not convert from domestic currency to foreign currency + Lack of knowledge and understanding about derivatives Due to the complex nature and requirements of enterprises, it is necessary to have a fast, accurate and constantly updated information system for forecasting international exchange rates; There must be a tool to measure and warn of exchange rate risk, a team of professional experts, so derivative products for businesses are still limited Because of these disadvantages, it is necessary to have a large enough entity to stand up to solve it completely before the situation gets worse, which is the State Bank of Vietnam THE REGULATION OF THE FOREIGN CURRENCY MARKET BY THE STATE BANK OF VIETNAM IN RECENT YEARS a Control foreign currency credit growth at a reasonable rate: - Narrow the cases of borrowing capital in foreign currencies According to Circular No 03/2012/TT-NHNN Except for foreign currency loans, if there is enough potential to repay the loan, other cases must be approved by the State Bank => This helps to prevent speculation in foreign currencies, helping the State Bank to control the foreign exchange market well b Apply synchronous measures to maintain the exchange rate within the committed range: - The SBV has set a target of maintaining the exchange rate within a range of no more than 2% - 3% to control expectations about the devaluation of VND (2013), creating conditions for businesses to be proactive in their production and business plans To achieve the set target, the State Bank of Vietnam manages the foreign currency market and strictly controls the exchange rate according to market signals, in line with the macro balances and international balance of payments, takes measures to increase the foreign exchange reserves of the State => As a result, the foreign currency market in recent years has been quite positive with the stability of the exchange rate c 0% interest rate applies to deposits in USD: => This measure of the State Bank is aimed at preventing speculation and hoarding foreign currencies to sell at a profit 10 d Announcement of the central exchange rate: - Issued Decision No 2730/QD-NHNN on announcing the central exchange rate of VND to USD, the cross rate of VND with some other foreign currencies Aims to help Vietnam's foreign currency market increase its resilience to external shocks and minimize adverse impacts on the exchange rate Encourages individuals and organizations to sell foreign currencies to buy VND to enjoy profits Limiting residents' foreign currency hoarding e Adjust the exchange rate incrementally to avoid shocks So, to learn more about the role of the State bank of Vietnam in the foreign exchange market, we will analyze more deeply in a case below: V - Year SPECIAL CASE During the period 1989 - 1993, the exchange rate of VND/USD is shown in the following table: USD/VND exchange rate Inflation (%) Official price of the state Market price +/- % 1989 4.200 4.570 +8.80 +34.070 1990 6.650 7.550 +13.50 +67.50 1991 12.720 12.550 -0.02 +68.00 1992 10.720 10.500 -0.02 +17.50 1993 10.835 10.736 -0.01 +5.20 Source: Vietnam banking scientific journal - - The above table shows that the VND/USD exchange rate fluctuates up and down over the years Because the state floated the exchange rate during this period, the VND/USD exchange rate tended to increase and was adjusted by the government to match the free market price closely However: The floating exchange rate has stimulated the psychology of foreign currency speculation, to enjoy the price difference Exchange rate fluctuations and lack of foreign currencies because of USD shocks, destabilize the economy => Therefore, the escalation in USD price has stimulated the psychology of USD reserves Foreign currency, which is already scarce, is not used for import and export activities but is traded around in circles between domestic organizations At this stage, the bank cannot control foreign currency circulation 11 - - - Faced with that situation, in 1992, the central bank changed the mechanism for operating the VND/USD exchange rate: + To replace administrative measures, forcing state-owned economic units with foreign currencies to sell them to banks at fixed exchange rates + Open a foreign currency transaction center for businesses and banks to exchange and sell foreign currencies at an agreed price + Abolish the form of regulating exchange rates for groups of goods in foreign trade payments between the budget and economic organizations participating in import and export, instead the Central Bank announces the official exchange rate With such a "flexible" exchange rate formation, management mechanism and regulatory intervention of the central bank, the psychology of foreign currency speculation has been relieved, preventing the trend of excessive USD price appreciation on the market Since 3/1992, the USD price started to decrease: Year USD/VND exchange rate Compare with last year (%) Inflation (%) 1993 10.835 - 5.2 1994 11.050 +1.98 14.7 1995 11.040 +0 12.7 1996 11.060 +0.18 4.5 Source: Vietnam banking scientific journal - In this case, we can see the role of the central bank in regulating the amount of foreign currency and stabilizing the exchange rate This action has a certain influence on the Vietnamese economy - especially when Vietnam is in a period of international economic integration CONCLUSION Vietnam's foreign exchange market has created a foreign exchange business environment for commercial banks and at the same time provides effective tools to hedge foreign exchange risks for importexport companies and investors international However, the foreign exchange market in Vietnam still has some limitations For the foreign exchange market to develop and perfect, to perform well its role as a bridge between the domestic economy and the world economy outside, the State Bank of Vietnam needs to a better job of regulating and taking appropriate policies to make the market work healthier and more efficient 12 REFERENCES Textbook of International Economics, National Economics University Thị trường ngoại tệ liên ngân hàng gì? Quy định thị trường ngoại tệ liên ngân hàng? (2022, October 16) Luật Dương Gia https://luatduonggia.vn/thi-truong-ngoai-te-lien-ngan-hang-la-gi-quydinh-ve-thi-truong-ngoai-te-lien-ngan-hang/ Ngân hàng Nhà nước tiếp tục ổn định tỷ giá (n.d.) Cổng Thông Tin Điện Tử Viện Phát Triển Bảo Hiểm ViệT Nam https://mof.gov.vn/webcenter/portal/ttncdtbh/pages_r/l/chi-tiet-tin? dDocName=MOFUCM236332 Vai trò điều tiết thị trường ngoại tệ Ngân hàng Nhà nước Việt Nam (n.d.) Tạp Chí Cộng Sản https://tapchicongsan.org.vn/web/guest/kinh-te/-/2018/47507/vai-trodieu-tiet-thi-truong-ngoai-te-cua-ngan-hang-nha-nuoc-viet-nam-hiennay.aspx Chính sách quản lý ngoại hối (n.d.) Ngân Hàng Nhà Nước Việt Nam https://www.sbv.gov.vn/webcenter/portal/m/menu/trangchu/qlnhvv? _afrLoop=3673619359873100#%40%3F_afrLoop %3D3673619359873100%26centerWidth%3D100%2525%26leftWidth %3D0%2525%26rightWidth%3D0%2525%26showFooter%3Dfalse %26showHeader%3Dfalse%26_adf.ctrl-state%3D9ltjlkn41_88 13 CÂU HỎI PHẢN BIỆN NHÓM - TOPIC Question 1: Foreign exchange policy is regulated by the central bank, so what advantages does this create when the government issues fiscal and monetary policies? As we all know, the long-term goal of monetary and fiscal policy is to ensure stable economic development and control inflation In particular, ensuring the stability of the value of the currency is the first thing to ensure, but sometimes it takes many accurate sources of information for the government to make a reasonable monetary policy Here, the central bank's participation in regulating the foreign exchange market, when the central bank is under the government, has brought certain information advantages to the government Knowing the exchange rate between Vietnam Dong and foreign currencies will help the government have an objective view of the value of VND at a certain time, along with some information about financial fluctuations inside and outside country Question 2: The position of VND after Vietnam joined the IMF? The IMF, also known as the International Monetary Fund, is an international organization that oversees the global financial system by monitoring exchange rates and balance of payments, as well as providing technical assistance and financial assistance upon request It can be seen that joining the IMF, as having an additional guarantee for the financial position of a country, or more clearly, is having an additional guarantee of value for a currency when traded on the market forex market Thereby enhancing the position of the VND, increasing the confidence of foreign companies when conducting import-export transactions with Vietnam Question 3: In addition to the advantages mentioned, does the foreign exchange market have any negative effects on the economy in general and Vietnam's import and export in the current period Basically, the foreign exchange market contributes significantly to promoting international trade Many people evaluate the role of currency as a lubricant for the exchange of goods between countries But at the same time, opening up opportunities to access foreign currency for the domestic market, which may lead to the phenomenon of domestic consumers preferring to use foreign currencies in domestic economic transactions Although the rate of this situation is very low, it is still impossible to be subjective, because that will lead to a series of collapses of the domestic economy 14 NHẬN XÉT KẾT QUẢ HOẠT ĐỘNG Tên thành viên Nhiệm vụ đảm nhận Thành tích Nhóm trưởng Nguyễn Tuấn Sơn Phạm Đức Minh Nguyễn Hoàng Tuấn Lê Quang Huy Tạ Xuân Sơn Nguyễn Cảnh Quân Nguyễn Hoàng Uyên Lê Thành Đạt Xây dựng khung tổng thể Tham gia đánh giá, góp ý chỉnh sửa nhiệm vụ thành viên Tổng hợp báo cáo Nghiên cứu, tìm kiếm data Tổng hợp báo cáo Nghiên cứu, tìm kiếm data Tổng hợp báo cáo Xây dựng slide Tìm kiếm ví dụ hình ảnh Xây dựng slide Tìm kiếm ví dụ hình Thuyết trình Tham gia xây dựng slide Thuyết trình Phản biện - Phối hợp thành công hoạt động thành viên, giúp người hiểu ý - Thống ý kiến thành viên, đưa định tối ưu cho nhóm Tồn tại/hạn chế - Chưa thể giúp thành viên hiểu lỗi cần chỉnh sửa Khiến lần chỉnh sửa chưa giải tốt vấn đề phát sinh - Tìm kiếm data, giải yêu cầu - Đưa tốt ví dụ, thơng tin thêm - Tìm kiếm data, giải yêu cầu - Đưa tốt ví dụ, thơng tin thêm - Hồn thành tốt nhiệm vụ, slide có lượng thơng tin đủ gọn - Chưa tìm kiếm đầy đủ thông tin, cần chỉnh sửa lại lần (sau lần chỉnh sửa hồn thành tốt) - Chưa tìm kiếm đầy đủ thông tin, cần chỉnh sửa lại lần (sau lần chỉnh sửa hoàn thành tốt) - Khơng có - Hồn thành tốt nhiệm vụ, slide có lượng thơng tin đủ gọn - Thuyết trình lưu lốt, dễ nghe, thời gian - Thuyết trình lưu loát, dễ nghe, thời gian - Phản biện tốt, nhanh, trọng tâm câu hỏi - Khơng có 15 Đánh giá (Thang 10) 10 9 10 10 - Khơng có - Khơng có - Khơng có 10 10 10 16 ... as the topic "OVERVIEW OF THE FOREIGN EXCHANGE MARKET AND THE PURPOSE OF INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM" with the aim of having a clearer view of the foreign. .. coordinate with these banks to compare, contrast and find out the purchase price or best seller IV INTERVENTION IN THE FOREIGN EXCHANGE MARKET BY THE STATE BANK OF VIETNAM Before looking at the interventions... OVER -THE- COUNTER MARKET INTERBANK MARKET: - The most developed form of the foreign exchange market, where transactions of exchanging and buying and selling foreign currencies between state banks and commercial